Global Problems in a Global Business: Are the Decreasing Remittance Costs Sustainable?

Westpac is the latest bank in Australia to have quit the remittance business. And we can tell you that its not the last one and you would see more banks exiting this business globally. The bank would be officially ending support to its remittance partners in March 2015. Rising regulatory compliance costs made it difficult for the bank to support the remittance firms. In the past two months, Australia's anti money laundering and counter-terrorism financing regulator has cancelled the license of three remitters, underlining the risk that banks were facing in dealing with such companies.

The global remittance business is $500+ billion strong. Numerous stakeholders are involved in this business including banks, money transfer operators and even third party players such as mobile operators. However, this broad interest belies a less than rosy outlook for the business. Different geographies display very different trends in remittances and an analysis of these trends shows that problems are beginning to arise in this space. These problems are due to regulatory issues, policy issues, business model issues, cost pressures and some are even related to macro-economic factors and others.

The initial trend has been that the remittance market is driven by Money Transfer Operators (MTO). Countries like Philippines even allow third party players such as mobile operators to handle remittance services. Moreover, new currencies like Bitcoin have become part of the remittance business as well as in countries like the Philippines.

In countries where regulations are strict, only banks are allowed to handle remittance services. If you look at banking revenues split - 80% of banks’ income is usually interest-based which includes loans, interests on credit cards outstanding, etc. The remaining 20% of the income is non-interest based which includes remittance services. With the financial crisis, interest-based business of most banks got affected, especially in the developed nations, and so banks went for increasing their non-interest based income by doing things like remittance. But not anymore. Interest based business of banks is coming back nicely and they don't want to deal with the headaches of remittance.

At a global level, the remittance transaction costs is decreasing due to new regulations. The Group of 20 leading economies (G20) has already come up with plans to cut the cost of remittances to around 5 percent of the value of each transaction, down from the current 8 percent estimated by the World Bank. The remittance cost once stood at 15%, illustrating a drastic fall in remittance costs for the end customer.

In India, banks have decreased costs by up to 30% by offering services that allow Indian migrants in the US and Britain to send money directly from their bank or credit card accounts to recipients in India. Saudi Arabia has reduced remittance costs to an even lower level in the range of 3%.

This is creating further pressure on remittance businesses in the internal cost of transferring funds. MTOs want to expand their reach, but with rising cost pressures, they intend to partner with banks, especially in emerging markets. But a new trend has surfaced in Australia which shows that banks are themselves quitting the remittance business.

A number of agents of MTOs (such as Western Union) will also be hit since they use bank accounts to deposit customer funds. These agents later settle with remittance network providers, such as Western Union, which help process the actual transfers.

This further creates a difficulty for the Australian government in keeping track of where the money is headed. With banks out of the picture, the government would have to put in extra efforts to closely monitor third party remittance players. The remittance firms argue that without access to the global banking system, the costs of transferring money becomes substantially higher.

The leading economies of the world wish to lower remittance costs for the end customer. But what about the margins that would keep the remittance business feasible enough for all stakeholders? The internal costs of processing the money transfers are not getting proportionally lower which puts increasing pressure on the MTOs. It seems the banks do wish to focus on remittance services but if margins are low, they will eventually quit the business (as witnessed in Australia). This would further lead to the end of valuable and practical partnerships that MTOs rely upon.

The current scenario calls for for technology, regulatory and business model transformation in remittance business. And there are new players (mobile apps based, bitcoin, others) already doing some good stuff. Interesting space to watch out for further disruption.

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